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Updated on Wednesday, February 6, 2019
Getting a mortgage after bankruptcy is no easy feat. However, it is certainly possible. Ideally, you’ll wait several years and rebuild your credit so you can get a good deal. But you can still qualify even if you don’t do that.“If you’d like to buy a house after bankruptcy, don’t get discouraged,” said Jerry Robinson, owner of 1st Choice Mortgage Company in Meridian, Idaho. “Put the time and effort into shopping around and evaluating the different mortgage programs available to you.”
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Let’s take a closer look at exactly what it takes to get a mortgage after bankruptcy.
How bankruptcy impacts your ability to get a mortgage
Bankruptcy can remain on your credit reports and affect your credit for up to 10 years. However, its impact will become less meaningful over time. Before we get into how bankruptcy may affect your ability to get a mortgage, let’s define the two major types of bankruptcy.
Also known as liquidation bankruptcy, Chapter 7 bankruptcy is designed for individuals with limited income who do not have the ability to pay back at least some of their debts. This type of bankruptcy involves selling possessions, including possibly your home, to pay off unsecured debts like personal loans, credit card debt and medical bills. It’s important to note that back taxes, student loans, alimony and child support are not usually forgiven in Chapter 7 bankruptcy.
Chapter 7 bankruptcy is the worst thing you can do to your credit score. It stays on your credit report for up to 10 years. However, that doesn’t mean you can’t get a mortgage during that time. “Anyone can obtain a mortgage after Chapter 7 bankruptcy, as long as they have enough money to put down and have waited enough time since their bankruptcy was discharged,” said Robinson. We’ll go over just how long you’ll have to wait later in this article.
Sometimes referred to as a “wage earner plan,” Chapter 13 bankruptcy allows individuals with sufficient income to repay all or some of their debts. That means you’ll pay more, but you won’t suffer some of the negative impacts of Chapter 7 bankruptcy.
For instance, a Chapter 13 bankruptcy only stays on your credit report for up to seven years, not 10, and it’s less detrimental to your credit score. You’ll usually also be able to keep your house.
Once you’ve completed your repayment period of three to five years, your unsecured debts — credit card and personal loan balances — may be completely discharged. When this happens, you won’t have to make any further payments.
“Individuals in Chapter 13 bankruptcy may be able to get a mortgage if they receive permission from their bankruptcy trustee,” said Robinson. “However, if possible, they should be patient and wait until after bankruptcy so they can raise their credit score and enjoy better mortgage terms.”
How long after bankruptcy can you get a mortgage?
You’ll usually need to wait until after your bankruptcy has been discharged to apply for a mortgage. The amount of time you have to wait is known as the waiting period. The length of your waiting period will depend on the type of bankruptcy you filed and the type of loan you’re seeking.
If you have filed for Chapter 7 bankruptcy, these waiting periods apply:
- Conventional loan: Four years from discharge date
- FHA loan: Two years from discharge date
- VA loan: Two years from discharge date
- USDA loan: Three years from discharge date
In the event you filed for Chapter 13 bankruptcy, keep the following waiting periods in mind:
- Conventional loan: Four years from discharge date
- FHA loan: No waiting period
- VA loan: No waiting period
- USDA loan: No waiting period
If your bankruptcy involved a home foreclosure, you may have to wait longer to get a mortgage. Here’s a look at the post-foreclosure waiting periods.
- Conventional loan: Two to four years if the property was discharged during bankruptcy, seven years in all other cases
- FHA loan: Three years from the date the foreclosure was completed and transferred back to the bank
- VA loan: Two years from the date the foreclosure was completed and transferred back to the bank
- USDA loan: Three years from the date the foreclosure was completed and transferred back to the bank
Exceptions for extenuating circumstances
If your bankruptcy was the result of extenuating circumstances, waiting periods may be reduced. An illness or death of the primary breadwinner, job loss, natural disaster or divorce may qualify as extenuating circumstances, depending on the lender.
Some lenders may reduce your waiting period to one year if your bankruptcy involved an extenuating circumstance. Keep in mind that you’ll likely be required to provide your lender with documentation that proves your extenuating circumstance. Medical bills, a job layoff letter, tax returns and a divorce decree are all examples of documents that may serve as valuable documentation.
Home loan options after bankruptcy
There are a number of home loans you may be eligible for after bankruptcy. Let’s dive deeper into each of them.
Conventional mortgages follow the guidelines set forth by Fannie Mae and Freddie Mac. They typically require at least a 3% down payment. However, at least 20% down is recommended so you can avoid having to buy private mortgage insurance. While credit score requirements vary from lender to lender, 620 is usually the minimum.
You’ll be more likely to get approved for a conventional mortgage after bankruptcy if you’ve met the waiting period requirement and re-established your credit by paying your bills on time and keeping your credit card balances low.
Conventional mortgage cost comparison
Let’s say you had a credit score of 700 before you filed for bankruptcy. Your bankruptcy was caused by a natural disaster and qualifies as an extenuating circumstance. You decide to apply for a $200,000, 30-year mortgage two years after your Chapter 7 was discharged. You now have a credit score of 640.
With a 700 credit score, you could have gotten a loan with an APR of 3.5%. Your monthly payment would have been $898. And the total interest you’d pay over the life of the 30-year term would have been $123,280.
Your 640 credit score and record of bankruptcy mean you’ll now pay more for your mortgage. You’ll only qualify for a loan with a higher, 4.5% APR. That means your monthly bill will be $1,013, $115 higher than in the before-bankruptcy scenario. The total interest you’ll pay for the loan term is $164,680.
In this situation, getting a mortgage after bankruptcy will cost you an additional $41,400 over the life of your loan because your lower credit score led to a higher interest rate.
FHA mortgages are backed by the Federal Housing Administration. If you have a credit score of 580 or higher, you may be eligible for this type of mortgage, and you may only need to pay a 3.5% down payment.
You can still qualify with a credit score as low as 500. However, if your credit score is between 500 and 579, you will be required to put at least 10% down.
Prior to applying for an FHA loan after bankruptcy, you’ll need to re-establish good credit and avoid taking on any any new debt. You may also have to outline what led to your bankruptcy in your loan application.
VA mortgages are specifically designed for veterans, service members and qualified spouses. They are guaranteed by the Department of Veterans Affairs and offered by private lenders like banks or mortgage companies.
If you are eligible for a VA loan, you may be able to receive one after waiting just one or two years after bankruptcy. Although you can take out a VA mortgage with 0% down, a large down payment can prove to lenders that you are serious about purchasing a home. It will also save you money on interest.
USDA mortgages are backed by the United States Department of Agriculture and focused on helping low-income residents in rural areas get mortgages at lower rates without any down payment requirements. To be eligible for a USDA mortgage, you’ll need a minimum credit score of 640. Although the waiting period for a USDA mortgage is three years, it can be reduced to 12 months if your bankruptcy was the result of extenuating circumstances.
How do I improve my finances after bankruptcy?
Improving your finances after bankruptcy takes a great deal of hard work and dedication. You have to consciously make the decision to control your spending and make wise financial decisions. Here are some tips on improving your finances post-bankruptcy so that you can increase your chances of getting approved for a mortgage.
Pay bills on time
It may seem obvious, but paying your bills on time is one of the most effective ways to rebuild your credit. If you tend to forget when your bills are due, setting up automated payments for regularly occurring bills may be a good idea.
Of course, this strategy will only work if you’re confident you’ll have the money in your bank account. Fortunately, many companies also allow you to sign up to receive notifications about your upcoming bills. You can use these notifications to ensure the funds to pay your upcoming bills are in your account.
You can also schedule a specific time each month to take care of all your bills. For instance, you may decide that the last Sunday evening of every month is your time to sit down, log in to all of your accounts, and make payments online. If you prefer to pay bills via paper check, you may use this time to write out checks and take them to the post office. Just make sure they will get to their destinations before their due dates.
Get a secured credit card
Getting a secured credit card is usually a great way you to raise your credit score because they’re relatively easy to get and the credit card company will report your payments to the credit bureaus. The trade-off is that you’ll usually have to pay a deposit that’s equivalent to your credit limit.
Robinson recommended getting two credit cards with credit limits of $300 or less. He said to charge $30 to each one every month and pay them in full. “This way, you can show you are being very responsible and may be able to drastically improve your credit score within 12 months,” he said.
Robinson explained that creating a budget and sticking to it, as well as putting money aside for a rainy day fund, can also help you keep your spending in check.
Don’t close credit card accounts
By closing credit card accounts, you’ll reduce the amount of credit at your disposal and increase your credit utilization rate — the amount of debt you have divided by all of your credit limits combined. An increased utilization rate may lower your credit score.
Therefore, if possible, keep your credit card accounts open. If you know you’ll be tempted to overspend, however, you may be better off closing them.
Taking out a mortgage is a large financial responsibility. If you are unsure of whether you can afford the mortgage payments, taxes, maintenance and other costs that come with homeownership, it may be in your best interest to wait. After spending some time rebuilding your credit and improving your financial situation, you may find that you are in a much better position to purchase a home.